2010 A-133 Report - Finance - University of Michigan

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THE UNIVERSITY OF MICHIGAN Notes to Consolidated Financial Statements--Continued Note 2--Cash and Investments--Continued Authorizations: The University’s investment policies are governed and authorized by University Bylaws and the Board of Regents. The approved asset allocation policy for the Long Term Portfolio sets a general target of 80 percent equities and 20 percent fixed income securities, within a permitted range of 65 to 90 percent for equities and 10 to 35 percent for fixed income securities. Since diversification is a fundamental risk management strategy, the Long Term Portfolio is broadly diversified within these general categories. Distributions are made from the University Endowment Fund to the University entities that benefit from the endowment fund. The endowment spending rule provides for an annual distribution of 5 percent of the one-quarter lagged seven year moving average fair value of fund units, limited to 5.3 percent of the current fair value to protect endowment principal in the event of a prolonged market downturn. Distributions are also made from the University Investment Pool to University entities based on the 90-day U.S. Treasury Bill rate. The University’s costs to administer and grow the University Endowment Fund and University Investment Pool are funded by investment returns. Cash and Cash Equivalents: Cash and cash equivalents, which totalled $194,645,000 and $358,373,000 at June 30, 2010 and 2009, respectively, represent short-term money market investments in mutual funds, overnight collective funds managed by the University’s custodian or short-term highly liquid investments registered as securities and held by the University or its agents in the University's name. Of its cash and cash equivalents, the University had actual cash balances in its bank accounts in excess of Federal Deposit Insurance Corporation limits in the amount of $6,838,000 and $10,788,000 at June 30, 2010 and 2009, respectively. The University does not require deposits to be collateralized or insured. Investments: At June 30, 2010 and 2009, the University's investments, which are held by the University or its agents in the University's name, are summarized as follows: 40 2010 2009 (in thousands) Cash equivalents, noncurrent $ 122,474 $ 181,564 Fixed income securities 1,372,232 1,261,477 Commingled funds 1,379,961 1,399,681 Equity securities 819,510 781,719 Nonmarketable alternative investments 4,024,853 3,502,987 Other investments 6,775 6,125 $ 7,725,805 $ 7,133,553
THE UNIVERSITY OF MICHIGAN Notes to Consolidated Financial Statements--Continued Note 2--Cash and Investments--Continued The University's investment strategy, like that of most other institutions, incorporates certain financial instruments that involve, to varying degrees, elements of market risk and credit risk in excess of amounts recorded in the financial statements. Market risk is the potential for changes in the value of financial instruments due to market changes, including interest and foreign exchange rate movements and fluctuations embodied in forwards, futures, and commodity or security prices. Market risk is directly impacted by the volatility and liquidity of the markets in which the underlying assets are traded. Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according to the terms of the contract. The University's risk of loss in the event of a counterparty default is typically limited to the amounts recognized in the statement of net assets and is not represented by the contract or notional amounts of the instruments. Fixed income securities have inherent financial risks, including credit risk and interest rate risk. Credit risk for fixed income securities is the risk that the issuer will not fulfill its obligations. Nationally recognized statistical rating organizations (“NSROs”), such as Moody’s and Standard & Poor’s, assign credit ratings to security issues and issuers that indicate a measure of potential credit risk to investors. Fixed income securities considered investment grade are those rated at least Baa by Moody’s and BBB by Standard & Poor’s. To manage credit risk, the University specifies minimum average and minimum absolute quality NSRO ratings for securities held pursuant to its management agreements. The University minimizes concentration of credit risk, the risk of a large loss attributed to the magnitude of the investment in a single issuer of fixed income securities, by diversifying its fixed income issues and issuers and holding U.S. Treasury securities which are considered to have minimal credit risk. The University also manages this risk at the account level by limiting each fixed income manager’s holding of any non-U.S. government issuer to 5 percent of the value of the investment account. Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of fixed income securities. Effective duration, a commonly used measure of interest rate risk, incorporates a security’s yield, coupon, final maturity, call features and other imbedded options into one number expressed in years that indicates how price-sensitive a security or portfolio of securities is to changes in interest rates. The effective duration of a security or portfolio indicates the approximate percentage change in fair value expected for a one percent change in interest rates. The longer the duration, the more sensitive the security or portfolio is to changes in interest rates. The weighted average effective duration of the University’s fixed income securities was 5.1 years at June 30, 2010, compared to 5.0 years at June 30, 2009. The University manages the effective duration of its fixed income securities at the account level, where fixed income managers generally may not deviate from the duration of their respective benchmarks by more than 25 percent. 41
Page 1 and 2: The University of Michigan Reports
Page 3 and 4: Report of Independent Auditors The
Page 5 and 6: Introduction THE UNIVERSITY OF MICH
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Page 27 and 28: Statement of Cash Flows THE UNIVERS
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This report is intended solely for
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In our opinion, based on our audit
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failures to the National Student Cl
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2010 A-133 Report - Finance - University of Michigan

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